Art Finance – Leaving the art on the borrower’s walls

In Europe, banks and other specialist providers of loans against art, antiques and collectible items have often no choice but to take possession of the collateral in order to perfect their security interest.  This is the case where the law of the country where the collateral is physically located when the security interest is granted, affords the lender no option to put third parties on notice that the lender has an interest in the collateral, other than by taking possession.

In the USA, it is not unusual for lenders against art to leave the collateral in the borrower’s possession.  The lender registers its security interest under the Uniform Commercial Code (UCC), thereby putting third parties on notice that the collateral is encumbered.  Registration has the effect of perfecting the lender’s security interest, by giving it priority over the claims of other creditors (assuming no other creditor has a prior valid security interest in the collateral). Special rules apply in the event of the borrower’s insolvency. Possession may still be required by the lender to mitigate risk, but not to perfect its security interest.

In England, the lender can register a security interest over chattels belonging to an English company, thereby perfecting its charge over those chattels (and potentially all other assets of the company if the lender takes a floating charge).  The lender can also register a ‘bill of sale’ if the chattels are owned by a private person; however, the bill of sale regime is antiquated and often incompatible with 21st century lending.  This means that in England, if the art is owned by a private person, the lender may have no choice but to take a pledge over the collateral.  A pledge is a security interest perfected by delivery of the collateral to the lender, accordingly the borrower may have no option but to part with possession of the collateral.

In recent years, some European countries have introduced registers of security interests over chattels based on the UCC model, thereby facilitating loans against art without dispossession.   Over time, this may well encourage the development of art finance in those countries, because lenders and borrowers will have the option to agree to lend/borrow against art without depriving the borrower of the enjoyment of the art itself.

France

In 2006, France introduced a register of pledges over chattels.  Articles 2333-2350 of the Civil Code now allow a lender against art to perfect a pledge by public registration if the art is owned by a private individual.

By registering its security interest, the lender’s charge over the art takes precedence over the rights of the borrower’s other creditors (assuming no other creditor has registered a prior pledge, or perfected a pledge by taking physical delivery).  There is no requirement to transfer possession of the art to the lender.

Registration is deemed to put the borrower’s other creditors on notice that the art is subject to the lender’s security interest.

Note that in the event of the borrower’s insolvency, the lender’s rights may be subject to priority rights of certain types of creditors.

Since 2006, the lender and the borrower can agree that upon an event of default, subject to certain conditions such as prior notice and a grace period, the lender will take ownership of the collateral which it may then sell to recover the outstanding amount of the debt.  The borrower is entitled to the difference between the value of the collateral and the amount of the outstanding debt.

Belgium

Following on from the French model, the Law of 11 July 2013 modified the rules of the Belgian Civil Code relating to pledges of chattels by introducing the concept of pledge without dispossession.  This type of pledge is perfected by registration in a register of pledges (Registre des gages). In other words, a pledge duly registered in the register of pledges will give the pledgee priority over the pledgor’s other creditors upon registration (assuming no other creditor has registered a prior pledge or perfected a pledge by taking physical delivery).  The lender will no longer need possession of the collateral in order to perfect its security interest.

Note that in the event of the borrower’s insolvency, the costs of administering the insolvency (including court fees and the liquidator’s costs) must be paid first.

As is the case in France, the traditional pledge, perfected by the delivery of the collateral to the lender, remains an option.

The Act introduced a simplified procedure to enforce a pledge.  Subject to certain conditions, the lender no longer requires permission from the courts to enforce the pledge provided that the borrower is not a consumer. Subject to prior written notice to the borrower in default, the lender can sell the collateral on a forced sale basis.  The parties can also agree that if the borrower (other than a consumer) fails to repay the loan when due, property in the collateral passes to the lender, subject to the lender paying the borrower a sum equal to the difference between the value of the collateral and the outstanding debt.

Spain

In Spain, the lender against art can take either a regular pledge (perfected by delivery) or a pledge without dispossession. The pledge must be granted in the form of a public deed and, in case of a pledge without dispossession, it must be registered in the Spanish register of moveable property (Registro de bienes muebles) in order to give the lender priority over the borrower’s other creditors (subject to any prior valid security interests). Charges over individual artworks as well as entire collections, can be registered. Registration attracts stamp duty, the amount of which varies depending on the amount of the debt that is secured by the charge.

Rest of Europe

Other European countries have not followed suit.  In England, there is no register of chattels owned by individuals other than the Register of Bills of Sale, a form of security ill-suited to 21st century lending.

In Switzerland, Italy and Germany, the traditional pledge perfected by delivery to the lender remains the norm.

Pierre Valentin, Agathe Jacquemet and Irene Fraile  

Articles published on this blog reflect the opinion of the stated author of the article only. The information they contain does not constitute legal advice.